Running a Small Business: How to Evaluate the Financial Health of Your Small Business - 5 Key Questions a Small Business Owner Should Ask

29 Jul
small business financial health

Routinely checking the financial health of your small business is one of the best business practices you can have in place. Just like you evaluate your own personal health using metrics like weight and cholesterol, using profit, cash flow, and debt obligations helps you assess your small business’s financial health. Each small business is unique; there is no one size fits all financial health plan for small businesses across all industries and all stages of growth. However, there are key questions to help you determine if your small business is in good financial health.

1. Is your business consistently generating net profit?

The answer to this question is critical in assessing the financial health of your small business. As a small business owner, you should have the right financial tools and systems in place to answer this question at any point in the fiscal year. If your business is not generating positive net profit year after year, it may suggest your business is not viable.

2. Can your business meet short and long-term financial obligations?

Liquidity refers to a company’s ability to pay its short-term financial obligations whereas solvency refers to a company’s ability to pay its long-term financial obligations. A healthy company must be both liquid and solvent.

Financial institutions and investors use ratios to analyze a company’s solvency. The debt-to-equity ratio takes the company’s debt and divides it by its equity to show whether or not the company has a high degree of debt. The less debt taken the greater the solvency will be. It should be noted that solvency ratios vary by industry and as such it is important to know what ratio is considered good for your business.

3. Is your business able to weather unexpected downturns and change?

Being knowledgeable, educated and aware of economic downturns, technology innovations, and others factors are critical to sustaining your business over time. Small business owners who can adapt their business concept and strategy to meet the needs of their customers are better positioned to sustain and grow their business.

4. How does your small business measure success?

Some small business owners develop and manage a bi-annual budget as a way to measure success. This financial management and planning task will help you assess what is working and what is not working before the end of the year. This will allow you to make necessary changes to your business to ensure a positive outcome each year.

5. Could your small business fund growth using debt financing and cash from earnings?

In order for your small business to grow successfully, you need to have a full understanding of its financials. It is critical for every business owner to know how to navigate the lending and banking landscape, have access to credit when necessary, and frequently monitor business cash flow.

In conclusion, knowledge of your business’s financial health can have a positive impact on your daily business decisions, and ultimately your bottom line. The opposite is also true. We provided these 5 questions to get you started. 

Five key questions to determine business financial health


About Excelsior Growth Fund

Excelsior Growth Fund (EGF) helps businesses in New Jersey, New York and Pennsylvania grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more